By Jonathan B. Wight Now that all the tinsel is being stored for another year, and the crumpled wrapping paper being put into the recycling bin, it's worthwhile to do a little self-examination into the ethics of Christmas. In particular, that ubiquitous red-and-white cherubic figure known as Santa Claus. Ever wonder how he makes all those toys? The answer is out: he uses elf slave labor. No kidding. The guy's an ogre, a sociopath. Here's the scoop: http://www.psmag.com/navigation/business-economics/economics-north-pole-santas-elves-slaves-96953/

By Jonathan B. Wight

Sam Adams, no relation to the beer maker, has written a fascinating account of Social and Economic Life in Second Temple Judea (2014).  For those who need some help putting this into context, the relevant years are 532 BCE - 70 CE.  What a fascinating time period!

Sam teaches Old Testament at the Union Presbyterian Seminary, and shares a meal with me and a group of other inquirers about once a month.  Talk often turns to issues of economic justice, with often similar and often diverse views heard from Christians, Jews, Muslims, agnostics, atheists, Republicans, Democrats, and independents.

The Hebrew Scriptures are brimming with economic injunctions designed to help solve problems that arise in commerce, from commitment to honesty.  There’s a lot in here about the moral limits to markets.

Here Adams discusses the views of Ben Sira, a “wisdom author” of the second century BCE:

“A merchant can hardly keep from wrongdoing, nor is a tradesman innocent of sin. Many have committed sin for gain, and those who seek to get rich will avert their eyes. . . . As a stake is driven firmly into a fissure between stones, so sin is wedged in between selling and buying” (Sir. 26:29–27:2).

Adam Smith likely read many of these Hebraic diatribes against the unscrupulous merchants, and the Wealth of Nations is overflowing with similar critiques.

Adams’ book provides wonderful insights into both economics and theology, relevant for our time.  Highly recommended.

By Jonathan B. Wight

How does a #2 pencil work? And why does it matter?

It’s all about chemistry, a subject I never mastered. But I did read this about the reason lead works in writing:

“The layers of carbon that make up graphite are weakly bonded (hence its adoption, in 1564, for pencils, which shed a visible trace when dragged across paper)

The New Republic has a wonderful article on what would happen if you could take that graphite and spread it so thin it would be only two-dimensional.  You would then have graphene, created in 2003.

Graphene is an apparently amazing substance. It:

* Can carry a thousand times more electricity than copper.

* Increases speed in data communication by a factor of 100.

* Is the thinnest material in the known universe.

* Is one hundred and fifty times stronger than an equivalent weight of steel.

* Is as pliable as rubber and can stretch 120% of its length.

Commercializing this amazing material will take time, and some applications (as in computers) may never pan out because of tricky properties of the material.

Nevertheless, graphene is one of the exciting reasons I’d love to live to be a hundred, to see what new products incorporating this come over the horizon. 

The #2 lead pencil is a pretty amazing invention in itself. Every budding economist should read Leonard Read’s “I, Pencil” to explain how the graphite, rubber eraser, wood, and paint are globally sourced, out of the control of any one individual. So much for self reliance.

By Jonathan B. Wight

Sen. Marco Rubio has attacked the reopening of diplomatic relations with Cuba, claiming that this will strengthen the hand of Cuban President Raul Castro and make life more miserable for the Cuban people.

Can anyone say that with a straight face, after President Nixon normalized relations with China in the 1970s—led then by the more notorious dictator Mao Zedong? Has the life of the average Chinese citizen become better or worse because of contact with the U.S.A.?

The answer seems like a no-brainer. John Stuart Mill in a different context wrote that:

“[T]he economical advantages of commerce are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. Commerce is now what war once was, the principal source of this contact.”

And further that:

“[I]t may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race.”

Put that in your pipe and smoke it, Sen. Rubio!

Source: John Stuart Mill, The Collected Works of John Stuart Mill, Volume III - The Principles of Political Economy with Some of Their Applications to Social Philosophy (Books III-V and Appendices), ed. John M. Robson, Introduction by V.W. Bladen (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1965). Chapter: CHAPTER XVII: Of International Trade.

By Jonathan B. Wight

Terrorists just won a big one. They have threatened to hack and disrupt the showing of a movie that allegedly lampoons a dictator.

Isn’t that what’s supposed to happen in a democracy?

Yet large movie chains are reportedly pulling the plug on Sony’s release of “The Interview”—about an absurd interview with the esteemed supreme leader of North Korea, Kim Jong-un, who turns 32 on January 8.  The threat is from hackers who have made vague threats. The movie may open in small independent theaters.

My hope is that the notoriety of this case will, as in other cases of censorship, give the movie far more visibility than otherwise, backfiring on the hackers.  

[Update: The use of assassination as a tool to deal with our adversaries, as used in this movie, is a huge moral issue that deserves its own separate discussion.]

[Update #2: For more on the ethics of assassination, see here.]

By Jonathan B. Wight

Everyone knows Brazil hosted the World Cup last summer, and suffered a humiliating loss to Germany in the semi-final.

Everyone knows Brazil spent around $14 billion on the Cup, including $3.6 billion to build or renovate stadiums.  About $270 million was spent on a stadium that was used … four times.

Coming up will be more billions spent on lavish accommodations for the summer Olympics in 2016.

In Brazil there’s plenty of money to spend on entertainment that generates dollars for multimedia companies and temporarily brings amnesia to the population about the insider crony capitalism and corruption that this whole mess inspires.

Despite the largesse to sports, Brazil apparently does not have the money to invest in clean water.  About 70% of Rio de Janeiro’s water flows untreated into Guanabara Bay. Not surprisingly, there is a lot of fecal matter floating around. A superbacteria found in the waters is the same kind normally encountered only in hospitals, and is difficult to control.

This example illustrates the fallacy that lives on in boardrooms of politicians and supposed city boosters around America—that buiding stadiums somehow is supposed to promote economic development. To be impolite about it, it’s rot.  Don’t take my word, look at the results of all the studies done by impartial evaluators, as reported by John Siegfried and Andrew Zimbalist in “The Economics of Sports Facilities and Their Communities,” The Journal of Economic Perspectives 14(3)(Summer, 2000): pp. 95-114.

Few ideas in economics offer unanimous findings: but one near certainty is that building stadiums involving public funds will generate a drag on economic development.

All aboard for Rio 2016! – a shining example of how not to do economic development.

[Photo: http://bodyboarding101.blogspot.com/2012/10/geography-sao-conrado-rio-de-janeiro.html]

Mark D. White

In today's "The Upshot" in The New York Times, economist Aaron E. Carroll bemoans the fact that health policymakers, regulators, and spokespeople are reluctant, and sometimes even forbidden, to discuss and make use of information regarding the cost effectiveness of particular treatments. The fear is that they will invoke the spectres of rationing and "death panels," or more generally, medical decisions made on the basis of money alone and not the needs or interests of patients and their loved ones.

I agree with Carroll that cost effectiveness is an essential and necessary topic for discussion; after all, health care has to be paid for by someone, who is responsible for making sure that scarce resources are used in the most beneficial way possible. And I think most people understand this principle as well, even if they don't want to acknowledge it at times of tragedy and impending loss.

If people are afraid of calculations of cost effectiveness, it's because they don't want some distant, faceless, bureaucracy using cold data to make decisions that affect such an intensely personal aspect of their lives. But the problem isn't the numbers themselves—it's who is using them to make the critical decisions.

If health care decisions had not been centralized under the Affordable Care Act (or a similar plan), and health care decisions were left in the hands of doctors, patients, and insurance companies unbound by government mandates regarding coverage, these parties together could use cost effectiveness numbers in a way that worked with each patients based on his or her interests, coverage, and resources. Each patient, together with his or her doctor and loved ones, could balance these various factors in a way that furthered his or her overall interests within available resources and insurance coverage. They could use cost effectiveness information as one input into a specific decision in a way that furthers that patient's interests.

I wrote about this aspect of private health care in "Markets and Dignity: The Essential Link (With an Application to Health Care)," my chapter in my edited volume Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems (Palgrave Macmillan), on pp. 13-14:

The possibility of making private decisions regarding the benefits and costs of various treatment options, whether for minor illness or chronic disease, puts the choice in the patient’s hands (as well as with her doctor and whomever else the patient wants to join the process, such as family or friends). In consultation with her doctor, the patient can assess the value of various treatments, considering the merits compared not only to their costs, and the benefits and costs of alternative options, but also other uses towards which those resources can be devoted, which are all subjective valuations. Perhaps she will choose not to undergo the premium treatment, even if she could afford it, because she wants to leave the money for her children, or take a cruise in the final months of her life; or perhaps she will sell her house to pay for a little more time on life support and with her grandchildren. In a market setting, this choice is hers, along with its benefits, costs, and other consequences.

I am not denying that the patient may not be able to afford the premium treatment because she does not have the resources for it; this is tragic, to be sure, but unavoidable in a world of scarcity. If she is not making these decisions, someone else is; an insurance company or HMO may also refuse her the premium treatment based on costs, and a government-run health plan may do the same. But in these cases, the decision would be made for her, according to someone else’s calculation of whether the treatment was “worthwhile” in terms of costs and benefits for the hospital, insurance company, or government health program, all of whom have scarce resources that must be allocated somehow. In a market context, the decision would be hers, even if it seemed she had no decision at all because she does not possess the resources, either due to bad luck or bad planning, or other choices made through her life.

All is not lost, necessarily; just because the premium treatment is out of reach does not mean there are not lesser, more inexpensive treatments that will also be of benefit. In a market system, this is the patient’s choice, just as she can choose what size house to buy, what model car to lease, what size TV to own. Every person prioritizes the various interests on her life; some forego the large house to take frequent vacations, some do the opposite. Some may opt for the cheaper treatment option to retain more resources for another goal in life, or to give more to others rather than spend it on premium care for herself. And certainly, past choices will constrain or expand her present options; one who spends her income on lavish toys throughout life should not expect sympathy when she cannot afford top-line treatment at the end of it. But these are her choices, while in any other system, this decision may be made for her, according to calculations based on the imputed value of her life and her well-being compared to other persons. Not every person can afford to have the premium treatment, but this fact is due to scarcity of resources, not the way in which they are allocated or distributed, and it will be true under a state-controlled system as well as a market system. A state system focused on efficiency cannot allow everyone to have the premium treatment either, and the choice of who (if anybody) undergoes it will be truly arbitrary, with no role for choice on the part of the patient or her family. Choices that so closely affect a person’s life should be made by that person alone (or other persons to whom she delegates—or sells—that authority); they should not be made by another party that either presumes to know her “true interests” or serves the collective weal in the name of efficiency.

By Jonathan B. Wight

Hope springs eternal, which is a good thing. 

Without irrational beliefs in good things, entrepreneurs would never make investments, knowing that 9 out of 10 new businesses will go bankrupt after the first year.

In that light, here’s a sign posted on a neighborhood tree, in block letters:

“DEAR SANTA, I CAN EXPLAIN….”

[Image: http://www.people.com/people/package/article/0,,20319528_20765152,00.html]

 

By Jonathan B. Wight

Okay, this will date me.  I learned macro the old fashioned way. Yes, the Keynesian (or Hicksian) IS/LM stuff that went out of fashion by the late 1970s.

Turns out, the old IS-LM model has done pretty well in helping explain life in a zero lower bound interest world with a liquidity trap. 

But I also studied monetarism, the idea that money matters, and that a set growth in the money supply should produce a set change in nominal GDP.  In short:

M*V = P*Q is true as an identity. 

The money supply times its rate of spending or velocity always must equal prices times outputs (nominal GDP).  We know this has to be true because we calculate velocity as PQ/M, hence the equation must be true after the fact.

The Model. Monetarists turn this into a model for predicting the future by making claims about the behavior of money demand, which in turn affects velocity. 

If economic transactions become more efficient over time (think of ATM machines), then it will take less money to conduct the same value of transactions as before.  This means that each dollar works harder, and velocity rises.

Suppose that financial innovation (growth in V) proceeds at about 4% per year.  Suppose also that real output potential (Q) grows by about 2% per year.  This implies that if money grows by 3% per year, the resulting inflation will be:

3 % + 4 % = % P + 2 %

Money growth + velocity growth = Nom. GDP growth = inflation + real output growth.

In this example, nominal GDP will be increasing by 7% and the inflation rate will be 5%. 

This approach sounds reasonable, and monetarism held high sway for a few years in the early 1980s when velocity behaved somewhat predictably.  In fact, some pundits suggested doing away with the Fed entirely and simply replacing it with a monetary rule (increase money by 3% each year, come hell or high water).

[This is a nice fantasy, that we don’t need anyone minding the store of money.  Or alternatively, we should simply do away with government fiat money and return to private bank money (ask Adam Smith about the Scottish banking panics….).]

Downfall of the Model. But by the mid-1980s the whole thing was a mess: no one could accurately predict money demand, and hence no one could predict the impact of money on nominal GDP. 

Come the Great Crash of 2008, the demand for money as a safe store of assets soared, hence the infamous liquidity trap: people and businesses wanted to hold money as an asset on their balance sheets because all the alternatives were too risky.  The Fed cooperated by increasing bank reserves. The result, as shown below, is a massive build-up of money and virtually no inflation.  People are holding money as a hedge against financial market risk.  Since they aren’t spending it, it won’t cause inflation.

The Ethics of the Fed:  Hence, the ethics of the Fed's actions during this crisis can be seen in a new light once we understand that the monetarist vision, while certainly and absolutely true in times of hyperinflation, do not apply to economies in a liquidity trap.  Of course, if sufficient confidence returns, people may decide to spend and the Fed would have to back-pedal.

Given the narrowing of the macro models now taught in graduate school, I had to help a new colleague recently who had never worked with IS/LM and didn’t know where it came from.  Age and maturity has a few perks!

If you’re curious, read Sir John Hicks "Mr. Keynes and the Classics – A Suggested Interpretation", 'Econometrica v. 5 (April 1937): 147–159.

By Jonathan B. Wight

I’ve been teaching students about Adam Smith’s moral sentiments model, which derives from human instincts.  Instincts often reside in that large part of human experience called the unconscious: we cannot direct nor stifle some urges that are not under rational control.

Moral sentiments give rise to moral norms (institutions) that are in well-socialized children are transmitted and internalized.  That is not to say all moral norms are desirable. Here is Albert Einstein, reflecting on socially-embedded racial prejudices:

A large part of our attitude toward things is conditioned by opinions and emotions which we unconsciously absorb as children from our environment. In other words, it is tradition—besides inherited aptitudes and qualities—which makes us what we are. We but rarely reflect how relatively small as compared with the powerful influence of tradition is the influence of our conscious thought upon our conduct and convictions.

The injustice of racism we hope will be undone, but likely not by pontificating intellectually on the need for human rights (valuable as that is). Human rights will arise as more and more people come to experience a change in moral imagination—the “aha” moment in which the duck becomes the rabbit—and people come to feel that people of another race/culture/tribe/nation are equal humans.

Once feelings are changed, people will adopt the rational arguments for extending human rights. It will be like slicing through warm butter.

[Thanks to Tony Martin for this link.]